Contractor or Employee? Silicon Valley's Branding Dilemma

Handy, a startup that lets users book cleaners and handymen, hires its workers as independent contractors. But according to a lawsuit filed by two former cleaners last month, the startup takes a very liberal interpretation of "independent," dictating what its cleaners wear, how they clean, and what they say, down to a parting "Thanks for using Handy!" That level of control, the suit claims, means the workers have been misclassified as employees and are owed employee benefits -- overtime pay, business expenses, and more.

It's the latest in a string of misclassification lawsuits aimed at startups that allegedly exploit the independent contractor model to save on labor costs. Handy, like any company, wants to sell a consistent, branded product -- in this case, a cleaner in a Handy uniform that shows up and cleans in a particular way. Handy, like almost every startup, hires independent contractors to do its work and gives specific training on how to do it. But IRS regulations forbid companies from controlling how independent contractors do their jobs, and workers are starting to show they're not afraid to sue. (A Handy spokesman said the company provides but does not require uniforms, and encourages but does not require certain behaviors in its cleaners.)

The Handy lawsuit is a perfect example of Silicon Valley's newest dilemma: Startups that deliver real-world services through an app want the product to be great every time. But controlling people as tightly as most apps control pixels is landing the startups in court. How best to toe the line?

For years, apps delivered digital goods like music, email, photos, or tweets. But in the rapidly growing“on-demand economy," startups will let you summon anything -- a driver (Lyft, Uber), your lunch (Sprig, Caviar, Postmates), your dry cleaning (Washio) -- at the touch of a button. To make that magic happen, a real person somewhere needs to do the work, and those people are almost always hired as independent contractors -- a flexible worker classification that lets startups grow as needed and save money by avoiding traditional labor costs like insurance and benefits.

Contractors, however, come with specific limitations. You can't tell contractors how to do their job -- not what to wear, how much to charge, what to say to customers, what materials to use. For startups that want to ensure a smooth, branded customer experience, that's a serious hindrance. And because companies keep ignoring it, it will likely lead to more lawsuits, attorneys say.

"Training and standardization, which is what a branded company sells, are completely at odds with using independent contractor service providers," said Beth Ross, a labor attorney who successfully argued in a recent case that
FedEx drivers are employees, not contractors.

Customers can be wary of hiring a service through an app, especially the first time they try it. Branding can fix that. For example, take Luxe, a valet service that just launched in San Francisco. You tell the app where you'd like to drop off your car, and when you arrive, a stranger walks up to you and asks for your keys.

This moment causes a bit of hesitation, but you're reassured by the branding -- the eye-popping turquoise jacket that each valet wears. Building trust through strong branding "is so important, especially for us," said Luxe CEO Curtis Lee. "You're giving us the keys to what is often the second-most valuable asset next to your home. Everything we do, from the way the valets are trained to the way they look, is to try to gain trust."

Branding can be more than just a uniform. Handy tells its cleaners how to dress, but it also tells them when to knock or ring the doorbell, whether to shake a customer's hand (always), whether to ask if they should take off their shoes (always), whether they can talk on the phone during the cleaning session (never), and more, the suit says. Those specifications likely make customers feel secure and at ease. They also violate many of the IRS standards for independent contractors, which say that they can't be told when, where and how to do the work.

"That's the whole point: an independent contractor is not told how to do things," said Shannon Liss-Riordan, a Boston attorney who's leading an Uber class-action lawsuit. "But that's not what's happening with these companies because they're trying to sell a particular service, a particular product."

Like many on-demand startups, Caviar uses independent contractors -- and ample branding -- to make deliveries from local restaurants. (Courtesy Caviar)

'Trying To Make The Customer Feel Safe'

Angela Jones, a 25-year-old Handy cleaner from Portland, likes the flexibility of contract work, but also feels that the company exerts too much control at times. She wishes she could charge more for cleanings, especially given that she's highly rated on the platform, but Handy sets all the prices. Jones also feels the company's strong branding can mislead customers into thinking Handy plays a bigger role than it does.

"I feel like Handy is trying to make the customer feel safe, but when you actually look at the agreement, all they're offering is a way for someone who needs the service done to find a service professional that can work with you," Jones said. "It seems like they're a cleaning company with employees, but it's not as cut and dry as that."

The independent contractor dilemma has another twist, too. Many companies, worried about a lawsuit, won't give their workers training or benefits, even if they think it would be helpful.

"These companies would probably love to give more training, if they could. They would probably like to give workers' compensation," said Shelby Clark, executive director of Peers, a sharing economy group. "But if they do that, that's a benefit. Their worker starts to look like an employee. I've heard this from companies about worker's comp: 'This is something we think is important but we can't do it.'"

The plaintiffs in the Handy (formerly Handybook) lawsuit said that Handy required them to wear a uniform -- something companies are not allowed to require of independent contractors. (Courtesy Handy)

Are Misclassification Lawsuits Inevitable?

On-demand startups are hot and getting hotter. Venture capital firms poured $1.6 billion into these startups in 2013, up from $700 million the year before, according to a report from Sherpa Ventures. As the companies grow in size and number, lawsuits will likely follow. Handy, which faces another misclassification suit from a worker filed in August, called both lawsuits "without merit" and said it would defend against them "vigorously."

Some startups, like food-delivery startup Munchery, have opted to make their workers employees, though the added expense could set them back in a competitive market. Sprig, a Munchery rival, used to make its delivery drivers employees but recently switched them all to contractors. Luxe valets are a mix of employees and contractors.

Lee, the Luxe CEO, believes that worker satisfaction was key to avoiding lawsuits. As long as contractors feel respected, they won't sue, he said.

"It really has to do with the philosophy of the company," Lee said. "Do you respect your employees or do you not respect them? ... With Handy, people felt disrespected. The independent contractor argument is just a way to express that."

Jones, the Handy cleaner in Portland, loves her job and its flexibility. But even she isn't sure that the extra expense she shoulders as an independent contractor is worth it, especially since the job may come with more restrictions than advertised.

"I feel like there's more that I need to look up and research," Jones said after learning about the lawsuits. "Maybe I'm not getting the best deal."

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